[T]he
ideas of economists and political philosophers, both when they are right and
when they are wrong, are more powerful than is commonly understood. Indeed,
the world is ruled by little else. Practical men, who believe
themselves to be quite exempt from any intellectual influences, are usually
the slaves of some defunct economist. Madmen in authority, who hear voices
in the air, are distilling their frenzy from some academic scribbler of a
few years back. . . . [I]t is ideas . . . which are dangerous
for good or evil.

About Real-World Economics

(Last updated: 11/01/2015)

We
live in a country in which many people, if not the vast majority, hold
beliefs about the
federal budget that are demonstrably inconsistent with the facts that
exist in the real world. The extent to which this is so is easily seen by
considering how many people would be surprised to discover that the size
of the federal budget as a fraction of our economy—that is, as a
percent of gross domestic product (GDP)—in the 2000s was about where it
was in the 1970s and was actually slightly smaller in 2000 and 2001
(17.6%) than it was in 1961 through 1964 (17.8%-18.2%). How many people
would be shocked to discover that there were more federal government
employees in 1967 (2.85 million civilians plus 3.45 million military)
than there were in 2013 (2.77 million civilians plus 1.53 million military)? How many would also be shocked to find that federal employees
as a fraction of the civilian labor force has fallen by more than 50%
since the 1960s? And how many know that Americans are one of the
least-taxed people among the advanced countries in the world?

These are all simple and easily verifiable,
real-world facts that most people would find almost impossible to believe
given the deluge of disingenuous, antigovernment rhetoric that is designed
to encourage us to believe otherwise.

The fact that the size of the federal budget
as a fraction of our economy in the 2000s was about where it was in the
1970s and was actually slightly smaller in 2000 and 2001 than it was in
1961 through 1964 is shown in Figure 1.

Figure
2 shows the relationship
between the number of Federal Government Employees—Total,
Civilian, Military, and Postal—and the CivilianLabor Force and Population of the United States from 1950
through 2014.

As is shown in this figure, the Total
number of Federal Government Employees (Civilian plus
Military) and federal Military employees fell substantially as
the Vietnam War wound down and the Cold War
came to an end. At the same time, the number of Civilian federal
employees has remained relatively constant since 1967 (hovering around
three million) in spite of the fact that the CivilianLabor
Force has doubled since 1967 and the civilian Population
increased by 90%. What's more, Figure 2 clearly shows that
Civilian federal employees as a fraction of the workforce has been cut
in half since the 1960s and by even more when we include Military
employees. Civilian federal employees were 3.7% of the labor force
in 1967; they were only 1.8% of the labor force in 2014, and it is worth
noting that 22% of all Civilian federal employees worked for the
Post Office in 2014 and delivered our mail!

This is what our ever-growing, out-of-control
federal bureaucracy actually looks like in the real world.

The fact that
Americans are not terribly overtaxed is shown quite clearly in the following
tables which are constructed from the official statistics of the
Organization for Economic Cooperation and Development
(OECD). These
tables show how the ranking of the United States among the OECD countries
for which data is available has changed since 1980 in terms of total
government tax revenues as a percent of
gross income (GDP) as well as this percentage for all OECD countries in
2013.

The United States ranked forth from the
bottom on this list in 2013. We collected 24% less in taxes in that year than the average for the OECD countries
(34%), 36% less than the 15 countries that were above the average (40%),
41% less than the top 10 countries (43%), and these are the most
prosperous and economically advanced
and productive countries in the world!

This is what our unbearable tax burden
actually looks like in the real world.

The ideas that the federal budget and federal
employment have grown voraciously over the past fifty years and that
Americans are terribly overtaxed are only three of the fiscal myths people
believe today. In a recent survey (February 2013), thePew Research Center asked 1,504
respondents: "If you were making up the budget for the federal government
this year, would you increase spending, decrease spending or keep spending
the same" for nineteen different categories of government expenditures.
The expenditure categories and results of the survey are given in
Figure 3.

These results suggest that the vast majority
of the American public is satisfied with the size of the federal
government we have, and, if anything, would like to see it increase rather
than decrease: For all categories of expenditures, other than the first
three, a larger proportion of the respondents would choose to increase
rather than decrease expenditures, and for all categories, even the first
three, a majority of those who had an opinion would either increase
expenditures or keep them the same. In addition, the three categories for
which more respondents would rather decrease than increase—Aid to the
world's needy, State Department, and Unemployment aid—sum
to just 3% of the federal budget while just five of the categories which
more respondents would increase rather than decrease—Social Security,
Military defense, Medicare, Health care, and Aid
to needy in U.S.—sum to over 70% of the federal budget.

These results
stand in stark contrast with those of the
Pew Research Center/USA Today survey
conducted later that same month. In this survey the respondents were asked
if the president and Congress should focus on spending cuts, tax
increases, or both in order to reduce the federal budget deficit. The
results are given in Figure 4.

Here we find that the overwhelming majority
of people (73%) would like to see the federal deficit problem solved
through only or mostly spending cuts rather than through only or mostly
tax increases (19%). In other words, an overwhelming majority of the
American people would like to have their cake and eat it too; they want to
increase the size of the federal government or keep it the same as they
solve the deficit problem through only or mostly spending cuts.

The Congressional Budget Office (CBO) publishes an annual report that
provides long-run projections of the federal budget.
According to their
2015 report, in order to balance the budget in such a way as to reduce
the net national debt to the average percentage of GDP
seen over the past 50 years (38 percent) would require a13% cut in spending
over the next 25 years in the absence of an increase in taxes, and even if
we do not wish to lower the net national debt relative to GDP just
keeping the net national debt from continually increasing relative to GDP
will require at least a 5.5% cut in spending.

The following
chart shows a breakdown of federal expenditures in 2015 with the CBO's 13%
and 5.5% holes in it:

Even a causal
examination of this chart reveals that it is impossible to maintain the
government the vast majority of the American people seem to want and, at the
same time, reduce the deficit by as much as 13% or even by 5.5% through mostly spending
cuts:

Maintaining our
current levels of expenditures on Social Security and Medicare—as over 80%
of the respondents in the Pew poll say they would chose to do—leaves only
55% of the budget to cut after deducting the 6% of the budget that goes to
interest on the national debt. It would require a 24% cut in the rest of
the budget to cut the total budget by 13% if we were to exempt Social
Security and Medicare from cuts if we wished to reduce the net national
debt to GDP ratio to its historical average and a 10% cut in the rest of
the budget just to stabilize this ratio at the current level.

Maintaining our current levels
of expenditures on aid to the needy in addition to those on Social
Security and Medicare—as over 80% of the respondents in the Pew poll also
say they would chose to do—leaves only 37% of the budget to cut after
deducting interest on the national debt. A 13% cut in the total budget
would require a 35% cut in this 37% of the budget and a 5.5% cut would
require a 15% in this 46%.

And
if we were to include maintaining our current levels of defense among the
excluded categories—as over 70% of the respondents in the Pew poll say
they would chose to do—it would leave only 20% of the budget to cut. A 13%
cut in the total budget would require a 64% cut in this 21% of the
budget, and a 5.5% cut would require a 27% cut in this 20%.

The federal budget has been at the center of the political debate in our
country for the past forty years, and, yet, few people seem to understand
how the money is spent. As the
Pew Research Center and
Pew Research Center/USA Today
surveys indicate, many, if not most seem to believe that somehow we
can cut the budget dramatically, say by as much as 10%, and can thereby save
a substantial amount in taxes without having to cut defense or Social
Security or Medicare and without cutting those programs that make up our
social safety net. At the same time there are those at both ends
of the political spectrum who believe we can save a tremendous amount in
taxes by cutting defense. (Coburn
Sanders) Figure 4 clearly indicates
that these beliefs are problematic. Figure 5 and Figure 6 below may
help to make this point even more forcefully.

Figure 5 is
constructed from theOMB'sTable 3.1—Outlays by Superfunction and Function.
This figure plots a breakdown of the actual, real-world
outlays of the
federal government in terms of its three largest categories
(Superfunctions) from 1940 through 2015: Defense, Human Resources,
and Net Interest both as a percent of GDP and of Total Outlays.

The first thing we see when we look at the graphs in
this figure is
that even though the size of the federal budget has changed very little relative to
the economy since the 1950s, the Human Resources component of the budget—those
programs that make up our social insurance system including Social Security, Medicare,
and the rest of our our social safety net—has grown dramatically. It has gone from less than 20% of Total
Outlays in the early 1950s to more than 60% in the 2000s and stood at 72% of
the federal budget in 2015.

At the same time we see that Defense
has decreased just as dramatically, going from over 60% of
Total Outlays in the early 1950s to around 20% in the 2000s and stood at
16% in 2015. Meanwhile the third largest category in the
budget, Net Interest, has gone from a high of 14.6% of the Total Outlaysin 1948
to a low of 5.3% in 2009. Net Interest stood at 6.1% in 2015. What is most relevant to the
point at hand, however, is what has happened to All Other Outlaysand Defensein this graph.

It is obvious—or at least it should be
obvious to anyone who looks at
the actual, real-world expenditures of the federal government plotted in
Figure 5—that there is no reason to
believe we can save a substantial amount in taxes by cutting the programs in the
All Other Outlays
category in Figure 5, obviously not enough to reduce the total budget by
10%. The expenditures on programs in this category have already been cut by
almost 60% since 1980, relative to the budget and to GDP, and even if we were to eliminate all of these expenditures completely—which,
of course, we can't do and still have a functioning government—we would
succeed in reducing the size of the federal budget by less than 8%. It is also
worth noting that, relative to the size of our economy, we have already cut the
programs in this portion of the budget below where they were in the
1950s relative to the size of the economy!

As for Defense, there may be some room to maneuver here
with the end of the wars in Iraq and Afghanistan and by realigning our budget
priorities away from the military threats we faced twenty-five or thirty years
ago and toward those we face today. There is, however, no reason to believe we
can solve all of our fiscal problems simply by cutting Defense. Defense was only
16% of Total Outlays in 2015 and 3.3% of GDP. Even if we were to cut
Defense in half—something
that virtually no one would be willing to do—it would reduce the
federal budget by less than 10%. Thus, if we are serious about saving as much as
10% of our total federal taxes, unless we are willing to make draconian cuts in
Defense or the rest of the federal budget, we must look to Human Resources.
That's where the money is, and it's also where Social Security and Medicare are,
as well as the other social-insurance programs that make up our social safety
net.

The question is:

Does it really make sense in the real world to think we can save
a lot of money by cutting Human Resources
without cutting Social Security or Medicare and without cutting the programs
that make up our social safety net?

TheOMB'sTable 11.3—Outlays for Payments for Individualsdetails the bulk of the expenditures contained in the
Human Resources category of the budget. Figure 6 breaks
down the items in Table 11.3 into four categories: Retirement/Disability
is the sum of all federal expenditures on retirement and disability programs.
Healthcare is the sum of all federal expenditures for individuals on
healthcare. Other Payments for Individuals is the sum of all federal
expenditures on all payments-for-individual programs that are not medical or
retirement/disability programs. The final category, Other Human
Resources, is the total of all government expenditures on all other Human
Resources programs. (For a detailed explanation of each of
these categoriesalong with a detailed examination
of programs that are included in each category see the expanded discussion of
this figure in Understanding
The Federal Budget.)

The first thing we see when we look at the breakdown in Human Resources
in Figure 6 is that Retirement/Disability has been the
largest component of Human Resources since 1952.

The second is that while there were significant increases
from 1965 through 1975 in all
four of the graphs in this figure, only Healthcare has
continued to increase after 1975. This component of the federal budget has grown
almost continuously from virtually nothing in 1965 to the point where it rivals Retirement/Disability as the largest component of
Human Resources today.

Retirement/Disability and Healthcare combined dominate Human
Resources and accounted for some 84% of all Human Resources
expenditures in 2015. This would suggest that if we are to find ways to make
substantial cuts in Human Resources we should
begin by looking at Retirement/Disability and Healthcare.

The problem is that when we look at
Retirement/Disability we find it is dominated by Social Security in that fully
76% of the total
spent on programs in this category of the budget went to Social Security
in 2015 while 19%
went to civil service, military, and railroad retirement/disability programs,
and only 4.5% to the Supplemental Security Income
(SSI) program.

There is no way to make substantial cuts in this
portion of the Human Resources budget without cuttingSocial
Security. After all, military, civil servants, railroad employees, and other
government employees are just as entitled to their retirement/disability
benefits as are Social Security recipients, and, in any event, these programs
take up only 6% of the total budget in 2015.

This leaves
the SSI program which
was 2% of Human Resource expenditures,1.4% of the federal
budget and 0.3% of our gross income in 2015. Aside from its insignificance, SSI is
the primary social safety-net program that provides for indigent disabled and
indigent elderly individuals who are either not eligible for Social Security or
whose benefits fall below a subsistence level. Substantial cuts in this program
would not only save virtually nothing, it would also tear a hole in our social
safety net.

Healthcare accounted for 30% of the federal budget
in 2015 with
Medicare and Medicaid accounting for
over 87.5% of this portion of the budget, and Medicare
accounting for 64% of this 87.5%. What about the 36% of this 87% that went to
Medicaid?

Medicaid represented 9.5% of the federal budget and 2% of our gross income
in 2015 and lies at the very core of our social safety net. According to the
Census
Bureau's Table 151. Medicaid—Beneficiaries and Payments: 2000 to 2009, some
75% of its beneficiaries were either poor Children, indigent
Blind/Disabled individuals, or indigent elderly adults age 65 and over, and over
85% of Medicaid's expenditures went to these
individuals. In addition, Medicaid is today an essential part of the Affordable
Care Act in that it lowers private insurance rates for people with preexisting
conditions by making it possible for healthy, able bodied adults who cannot
otherwise afford private insurance to be included in the insurance pool. Thus, it would appear that there is very little room to cut this 9.5% of
the budget without causing a great deal of hardship and misery through the
denial of medical services to poor children or indigent disabled or elderly
adults if private insurance rates are to be kept low for people with pre
existing conditions.

Veterans certainly have as much right to their medical benefits as Medicare
recipients, and the rest of these programs play an important role in our social
safety net. In addition, since the rest of these programs took up only 1.0% of
the entire federal budget in 2014 there is virtually nothing to be saved in
taxes by eliminating these programs.

The leaves but two categories in Figure 6 to examine:
Other Payments for Individuals and Other Human Resources.

Other Payments for Individuals includes the expenditures on
all of the federal programs in the OMB'sTable 11.3 that are not medical or retirement/disability programs. This is where we find the programs that make up our social safety net.

There is no reason to think that we can save a great deal in taxes by
making substantial cuts in this portion of the budget without
dismantling our social safety net and causing a great deal of hardship
and misery. The money just isn't in this 10.4% of the budget, and
it's through the programs in this portion of the budget—combined with
Medicaid and SSI—that our war against hardship and misery is waged. (For
a detailed examination of
our social safety net see
Chapter 4of Understanding
The Federal Budget.)

This leaves only Other Human Resources in which to
find those elusive programs on which the government is supposedly squandering
our federal tax dollars. Other Human Resources is the total of government
expenditures on all Human Resources programs that are not included in
the other categories in Figure 6.It is
calculated by subtracting the sum of Retirement/Disability,
Healthcare, and Other Payments for Individuals in Figure 6 from the total of Human Resources given in
Figure 5.

This residual can be disposed of rather quickly. It
represented only 1.4% of the budget in 2015 and 0.29% of our gross income, and aside from the fact that
1.4%
of the budget is insignificant in the grand scheme of things, as is shown in
Figure 6,the programs contained in Other Human Resources
have already been cut by more than 57% relative to the size of the economy since 1980. There is no reason to
believe that additional savings can be found in this 1.4% of the budget.

That's it! That's all there is to the entire federal
budget! Everything the government spends money on in financing its ongoing
operations is included in one or
another of the categories contained in Figure 5 or Figure 6:
Defense, Net Interest, All Other Outlays,
Retirement/Disability, Healthcare, Other Payments for Individuals,Other Human Resources.
(The programs in each of these categories are examined in detail in
Understanding
The Federal Budget.)

This is the
situation that actually exists in the real world, and this is what Real-World Economics is about. It’s about cutting through the rhetoric, the
spin, the propaganda, and all of the other nonsense that exists in the
imaginary world many, if not most people have come to believe in,
and looking at the facts
as they actually exist in the real world, the world in which we actually live. It is hoped that looking at the facts
in this way will introduce a degree of rationality into the otherwise hopelessly
irrational debate we have been subjected to over the past forty years. After all, facts do matter, or at least they should.

Many of the papers on this website, including this introduction,
have numbers in them. I realize that many people have an aversion to
numbers, but I make no apology for including them here. For the past forty years we have lived in a world in which one end
of the political spectrum has insisted that two plus two is six and demonized
anyone who argued otherwise. Those who argued that two plus two is four
have been ignored while the vast majority of the population, including our
political leadership, has come to the conclusion that this sum must be five. Our nation’s economic policies have been guided accordingly with results that
are totally consistent with the logic involved. This is the kind of
arithmetic
that got us into the mess we are in today, and it is not going to get us out.
The time has come for people to look at the numbers and learn how to add.

This is particularly so when it comes to trying to understand our
economic system. It is impossible to understand the economy without
looking at numbers. The reason is no one can actually see the economy.
The economy is made up of some 315 million people, 114 million households,
27 million business firms,
89 thousand governments,
innumerable goods and services, and it is spread throughout the land and has
tentacles that stretch all over the world. All we can actually experience of
the economy is the very tiny part we personally interact with, and our
personal experiences tell us virtually nothing about the whole.

The only way we can come to grips with the whole is to look at
numbers. Output numbers. Employment numbers. Government numbers. Production numbers. Price numbers. Money supply numbers. Income numbers. International numbers. Debt numbers. Numbers! Numbers! Numbers! There are often
very real problems in obtaining the numbers needed to
understand the economy, and often the numbers we have don't measure what we
want them to measure or think they measure, but, in the end, all we can
actually know about the economic system is numbers. Everything we think we
know about the economic system is just speculation unless it is supported by
numbers, and everything we think we know about the economy that is
contradicted by the numbers is just hot air in the absence of an explanation
as to why the numbers are wrong.

In
searching for ways to cut the federal budget it is important to understand
that cutting a
small amount from a large portion of the budget or a large amount from a small portion of the budget may yield a lot of money in absolute terms, but it
doesn't yield a lot of money relative to the size of the total budget. It only reduces the
total budget by a small amount. To reduce the total budget by a large amount
we have to cut a large amount from a large portion of the budget. That's just
grade school arithmetic.

When we
look at the actual expenditures in the federal budget over the past forty
years we find that it is not possible to cut a large amount from a large
portion of the budget without cutting defense, Social Security, Medicare, or
the programs that make up our social safety net because that's where the
money is. The rest of the budget has already been cut to the bone since 1980,
and there simply isn't enough money in the rest of the budget to make a
difference even if we cut a large amount from this small portion of the budget.

At the
same time, when we look at the actual numbers that exist in the real
world we find there is no reason to believe we can reduce the size of
the federal government by increasing our efforts to target specific instances
of waste, fraud, and abuse, because there simply aren't enough specific
instances of waste, fraud, and abuse in the budget that are of sufficient
magnitude to make a difference in this regard. At best, all we can hope
to do by expanding our efforts in this area is cut a small amount from a large
portion of the budget, and doing this could actually cost us more to do than
we can save by doing it. (See Waste, Fraud, and Abuse in the
Federal Budget.) This doesn't mean we should ignore this
problem. It only means that we should not expect to see a substantial
reduction in the size of the budget as a result of our efforts to solve it.
Those who think otherwise have a problem with arithmetic. Their numbers just
don't add up. (Cf. Coburn,
Sanders,
MFCU,
NYT, and
St Luis Fed.)

It seems to me quite clear that these are all things the vast majority of
the people want the government to provide. (Pew) This does not mean the
vast majority of the people expect the government to take
care of their every need. It means the vast majority of the people realize
that, in the real world, only the government can perform these kinds of
economic goods in a fair, efficient, and effective way. These are not the
kinds of economic goods that can be performed fairly, efficiently, or
effectively by the private sector of the economy. (AmyLindert)

The response from those who are waging their own private war against
the federal government is that we must cut the budget—especially Social Security, Medicare,
and the rest of our social welfare system—because deficits and the national debt are out of
control. But if
we really do want to balance the budget and, at the same time, provide the
government that the vast majority of the American people seem to want,
balancing the budget through mostly tax increases makes much more sense than
trying to do so through mostly spending cuts. National
income in the United States amounted to $15,535
billion
in 2015, and total federal outlays came to $2,765
billion.
This means that the total tax liability created by a 13% hole in the federal
budget amounted to only 2.3% of our national income. Does it really
make sense to make dramatic cuts in
Social Security or Medicare or to dismantle a major
portion of the rest of the federal governmentrather than pay the extra
3% or 4% of our income needed to fund a government that can function?

But we live in a democracy. I don't get to
decide. This is something a majority of the American people must decide, and
the first thing we as a people must decide is whether we want to keep the
government we have, as an overwhelming majority of the people seem to want
to do, or dismantle that government in an attempt to balance the federal
budget, as an equally overwhelming majority of the people also seem to want to do.
We can't do both, and if we want to keep the government we have we must
first
accept the fact that we have to raise the taxes needed to pay for it.

Finally, I freely admit there is no reason anyone should agree with
everything I have to say in the essays on this website, and constructive
criticism is more than welcome. If you find a mistake, I will fix it
immediately and will be ever so grateful when you point it out to me. If
you can convince me I am wrong, I will change my mind. If not, we can
agree to disagree. What's important is that we establish the facts as they
exist in the real world, not that we agree on the interpretation or meaning of
those facts.

I am convinced that it is what people "know for sure that just ain't so" that
has brought us to where we are today. I also believe that if we are to
find solutions to the seemingly insurmountable political, social, and economic
problems we face today we must begin by leaving the
imaginary world that is created by rhetoric,
spin, propaganda, and all of the other nonsense and face the facts that exist
in the real world, the world in which we actually live.
Real-World Economics is my contribution toward
the effort to make this possible.